By Mike Sorrells, CPA
Private foundations face an obstacle when they wish to make grants to foreign organizations that have not been granted Section 501(c)(3) status by the IRS. In such situations, the foundations are required to either 1) exercise expenditure responsibility over the grant, or 2) have a good faith determination that the foreign organization would qualify as a Section 501(c)(3) public charity if it were a U.S. organization. Without one of these elements, the foreign grant will not be considered a qualifying distribution (i.e., counting toward minimum distribution requirements), and will result in excise taxes.
In the past, such equivalency determinations could only be made based on either an affidavit of the grantee or on an opinion of counsel from either the grantor or the grantee. Proposed regulations were released in 2012, which expanded the list of tax opinion providers to include “qualified tax practitioners”—in other words, certified public accountants and enrolled agents.
The final regulations released on Sept. 23, 2015, make permanent this expansion of persons who can provide the equivalency determination opinion. At the same time, the final regulations make it clear that foreign counsel can no longer make this determination, but that qualified tax practitioners may use foreign counsel to collect information or to advise on foreign law. The final regulations also limit how private foundations may use entity affidavits. Such affidavits may no longer be the sole means of meeting the good faith determination requirement. The regulations do allow such affidavits to be used as a cost-effective source of information by the qualified tax practitioner in making his or her tax opinion.
The final regulations also limit the reliance on written advice to two years, beginning on the date of the written advice, or the date of the factual information used in the written advice. The IRS also noted that when a foundation creates written advice regarding its good faith determination, that advice can be used by another foundation to make the same determination about a foreign entity, as long as the organization has knowledge about the qualified tax practitioner issuing the advice, and the practitioner has received all relevant information.
The final regulations should remove some of the barriers to making foreign grants, while still assuring that the good faith determinations are made with sufficient understanding of the law.
Has your organization gotten up to speed on these new grant regulations?
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Winter 2015). Copyright © 2015 BDO USA, LLP. All rights reserved. www.bdo.com+